Whitehaven News

Family planning: how a trust can help

By Bob Wheatcroft, of Armstrong Watson

Last updated 08:44, Monday, 31 March 2008

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All going swimmingly: Children are a joy, but they are also costly and the expense doesn’t end when they leave home to go to college

Children are an expensive pleasure. The delight and pride in their achievements does not stop if they leave home to go to university – and neither does the expense.

Last year I explained how parents might want to use a trust to buy accommodation for student children going to university. This is still a very attractive and tax-efficient way of dealing with that problem. It can avoid the worry of valuable assets being placed in the names of relatively young and, perhaps, vulnerable people, while retaining the tax advantages of owner-occupation.

The parents can make all the important decisions over the property and ensure that excessive sums do not go to students prematurely (or even at all) while keeping the important Capital Gains Tax exemption for main residences.

The residential property market has suffered some uncertainty in recent months but we all need somewhere to live. If your view of the future of property prices is positive, and you have children at or going to college, then you should consider the option.

Somewhere to live is not the only expense for students of course. Furthermore, many parents will not want to be involved in property ownership for what is, after all, only a three-year period in most cases. Parents and grandparents will often have to dig deep into their pockets to top up student loans or to repay them some time after the course has finished.

If you plan to do this, why not think ahead and set aside an amount of capital at an early stage? Properly invested, the amount can produce a regular amount for the student during his or her studies or a lump sum at some stage in the future.

If the money is placed in a suitably worded trust, then the gift is treated as being made straight away for Inheritance Tax purposes but control over the monies can be kept with the parents. You can turn the financial tap on and off if you want.

Making a gift into trust is a bit like deciding to give something away but delaying the decision on who receives the benefit.

The trust capital can easily be added to from time to time if needs be.

Alternatively, you might decide at some stage to wind up the trust and distribute the remaining capital.

The beauty of a trust arrangement is that it is (or should be) flexible and capable of responding to changing circumstances.

Any income generated from the trust investments need not be taxable on the parents.

Through careful dovetailing of the tax and investment strategies this often produces significant additional benefits.

The use of trusts has been a perennial theme of my articles – but I make no apology for that. Trusts are not the preserve of the super rich and, while you should always take good advice, their use can benefit a wide range of us in our family financial affairs.

When children fly the nest to go to university there will be significant financial issues to address. Make sure that you think about those matters in advance and to your best advantage.